Expedia Is Better Positioned For Growth After The Travelocity Deal

Expedia signed a strategic marketing agreement with Travelocity last month. According to the deal, Expedia will power Travelocity’s technology in the U.S. and Canada while the latter will focus on brand marketing. The implementation is expected to occur in 2014.

In effect, Travelocity will act as an additional distribution channel for Expedia’s inventory as the two companies’ user bases overlap by a relatively small percentage.

Travelocity could generate up to $300 million in annual revenues for Expedia.

The increased scale of operations will allow Expedia to negotiate contractual prices with suppliers and also enhance efficiency.

We believe such partnerships will help Expedia drive market share growth in the U.S.

Expedia (NASDAQ:EXPE), the world’s leading online travel agency (OTA), inked a strategic marketing agreement with rival Travelocity last month. As per the deal, Expedia will provide content, inventory, customer service and technology to Travelocity while the latter will focus on brand marketing and receive a performance-based marketing fee. The two parties intend to begin development this year with the launch expected to happen in 2014. The deal pertains only to Travelocity’s websites in the U.S. and Canada. However, it also gives Expedia the option to acquire certain assets from Travelocity at a later date. [1]

Expedia admitted that it faced strong competition from Priceline (NASDAQ:PCLN) and Booking.com in the U.S. in Q2 2013, which hampered its room night growth. [2] It could have simply acquired the struggling Travelocity to increase its competitiveness in the U.S. market. However, this could have also triggered antitrust violations. Thus, in our view, the partnership route with Travelocity is a safer bet. The company has demonstrated success in previous partnerships, including that with eLong and AirAsia. We believe that Travelocity will help Expedia defend its share in the U.S., by acting as an additional distributional channel for its inventory.

Where’s Expedia In The World’s Largest Online Travel Market?

Having the highest Internet penetration in the world (78.6%), the U.S. has a higher proportion of travel booked online (51.5%) compared to other regions. The country has the biggest online travel market in the world with estimated revenues of $151 billion in 2012. It is expected to grow to more than $180 billion by 2016, representing CAGR of about 5%.

Expedia is the market leader in U.S. online travel bookings. It had 45% share in total OTA bookings in the country in 2012. [3]However, rising competition from Priceline and Booking.com in the U.S. slowed down Expedia’s room night growth from 28% y-o-y in Q1 2013 to 19% in Q2 2013. [4] Competitors have been constantly eyeing Expedia’s big share. Hence, the company needed to formulate a defensive strategy. With 16% share in OTA bookings, Travelocity accounts for a substantial portion of online travel bookings in the U.S. Through Travelocity, Expedia will be able to sell additional inventory in the country, allowing it to defend and even grow its share of the online travel market.

Expedia Could Gain Up To $300 million In Revenues From Travelocity

According to ComScore’s July 2013 rankings of OTAs based on number of unique visitors, Expedia is the most popular website with 22.7 million visitors, while Travelocity stands fifth with 7.2 million. The two companys’ user bases overlap by a relatively small percentage. Only 55% of travelers who visit Travelocity also visit Expedia websites. [5]This presents a lucrative opportunity for Expedia to tap into Travelocity’s user base in order to grow travel bookings.

The deal will not only eliminate competition for Expedia to some extent, but also create an additional distribution channel for the company. The increased scale of operations will help the company negotiate better terms with inventory suppliers and enhance efficiency at the same time. Expedia could get up to $300 million in annual revenues from the partnership. [6] Driven by such collaborations, we estimate that the company’s market share of hotel bookings will continue rising in the future. We have updated our forecast for Expedia’s market share which led to a marginal increase in stock price.

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